Canadian Currency Falls to Two-Month Low Amid Speculation on Fed

Canada’s dollar reached the weakest in more than two months on speculation a strengthening U.S. economy will prompt the Federal Reserve to reduce stimulus measures that have helped to bolster growth worldwide.

A measure of the currency’s volatility rose to a one-month high, while crude oil, Canada’s largest export, dropped to the lowest level since June. The U.S. dollar rose against the majority of its 16 most-traded peers after reports last week showed American payrolls and gross domestic product grew more than forecast. The U.S. is Canada’s biggest trade partner.

“The market is still digesting the implication of the strong U.S. jobs report from Friday, and also we don’t have a lot of data this week,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank’s TD Securities unit, said by telephone from Toronto. “The focus is definitely on the U.S. right now,” and the greenback will dominate the direction of the currency pair, Moore said.

The loonie, as the Canadian currency is nicknamed for the image of the waterfowl on the C$1 coin, depreciated 0.2 percent to C$1.0495 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0509 per U.S. dollar, the weakest level since Sept. 5. One Canadian dollar purchases 95.30 U.S. cents.

The Canadian currency was the third-worst performer in the past six months among the 10-developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The loonie lost 3.8 percent, trailing the Australian dollar and the Norwegian krone. The U.S. dollar gained 0.4 percent.

Bonds Drop

Canadian government bonds fell, pushing yields on 10-year debt (GCAN10YR) to the highest in almost four weeks. The benchmark yields increased as much as five basis points, or 0.05 percentage point, to 2.66 percent, the highest since Oct. 16, before trading at 2.64 percent. The price of the 1.5 percent security maturing in June 2023 dropped 30 cents to C$90.40.

Thirty-year bond yields increased as much as five basis points to 3.21 percent, also the highest level since Oct. 16, before trading at 3.2 percent. The Bank of Canada will auction C$1.4 billion ($1.3 billion) of 3.5 percent securities tomorrow maturing in December 2045.

Canadian Finance Minister Jim Flaherty said the federal government will record a budget surplus of C$3.7 billion in the year starting April 2015, up from the C$800 million projected in March, as it moves more quickly to reduce program spending.

U.S. 10-year (USGG10YR) note yields increased as much as four basis points to 2.79 percent, the highest since Sept. 18, as signs America’s economy is gaining momentum fueled bets the Fed will start slowing its asset purchases.

Fed Stimulus

The U.S. central bank buys $85 billion per month in bonds to depress long-term interest rates and stimulate economic growth. The purchases tend to debase the greenback while increasing investor risk appetite.

“The Fed is going to start tapering this year and hopefully finish it up by the end of next year, so I think we’ve seen the dollar regain some ground today, especially against the Canadian dollar,” said Eimear Daly, a currency-market analyst at Monex Europe Ltd., by phone from London. “We’ve seen a backup in interest rates in the U.S., and that really backs up the Fed going in and cutting.”

Employers in the U.S. added 204,000 jobs last month, the Labor Department said Nov. 8, versus a Bloomberg survey’s forecast of 120,000. American GDP expanded 2.8 percent in the third quarter, beating a Bloomberg poll’s forecast of 2 percent, a report on Nov. 7 showed.

Implied Volatility

Implied volatility for three-month options on the U.S. currency against the loonie reached 6.15 percent, the highest intraday level since Oct. 11. The measure is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.71 percent.

The cost to insure against declines in the Canadian currency versus its U.S. peer rose to the highest almost four weeks. The three-month so-called 25-delta risk-reversal rate reached 1.37 percent, the most since Oct. 16. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

The Bank of Canada last month cut its growth projections for the next two years and removed language about the need for higher interest rates that had been included in every policy statement for a year.

The central bank, which has held its key rate at 1 percent since 2010, said the export pick-up that underpins its growth projections is taking longer than expected to materialize.

Crude oil snapped a two-day winning streak today. Crude for December delivery tumbled as much as 2.4 percent to $92.86 a barrel in New York, the lowest intraday level since June 24.

The Standard & Poor’s GSCI index of raw materials fell 0.8 percent in its first decline in three days, and the S&P 500 Index of U.S. stocks declined 0.2 percent.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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